I know a lot of you ask, “Bob, why do you waste so much time on a Keynes-friendly grad student?” But it’s my blog. Go do something “important” on your blog, if you like.

Anyway, Daniel rushed to Krugman’s defense vis-a-vis Jon Stewart. The odd thing is, Daniel actually agrees with Stewart that the platinum coin idea is goofy and a distraction from the serious problems our noble leaders must face. So I was dumbfounded: Stewart was obviously funny, and he (according to Daniel) was correct in even his analysis of the platinum coin. So why isn’t this a clear-cut case of Krugman being toolish (not to be confused with foolish)?

It turns out that Daniel didn’t like the opening context Stewart gave to the original joke. OK, I challenged Daniel to say–in the same number of words, more or less–something that would have caused him to think the skit was hilarious, with no caveats. To refresh your memory, here’s what Stewart actually said, before going into his bit about, “Why don’t they just make it a quibbillion dollar coin?”

“Hey everybody you may be aware, America has a bit of a cashflow problem. With a $16 trillion debt, and the recent downgrade, it’s time to show the world we’re serious and restore the soundness of our currency.” [Not a literal transcript, but captures the gist, and might be missing a sentence.–RPM]

Here’s Daniel’s suggested replacement for the above:

“Hey everybody you may be aware, America has a bit of an unemployment problem. And even though nobody trusts Congress these days, people still consider the government such a safe bet they’re actually paying them to borrow money. But people from the right to the left still seem convinced its fiscal doomsday and insist that we don’t get paid to take other peoples’ money. So to get around Congress…”

Nope, sorry Daniel, if Stewart said your intro, and then went into his jokes about the platinum coin, it would have made absolutely no sense whatsoever. After further review, I still think Jon Stewart knows more about comedy than you or Paul Krugman.

But all is not lost. Daniel’s suggested intro would work, if, say, there were an economist who proposed paying one group of workers to dig ditches, and the other to fill them up, or who–oh I don’t know–proposed burying bottles of money in the trash heap, so that other workers would have to dig them up. Then Daniel’s intro would be a good setup, so we could all laugh at these idiotic proposals.

But for this idiotic proposal–to take a platinum coin and slap “ONE TRILLION DOLLARS” on it–nope, Stewart’s into works much better.

Major_Freedom, I understand supporting debt repudiation on regular bond holders, but not supporting a trillion dollar coins. I’ll agree that it doesn’t follow because it’s not the same. They have different effects. On the other hand, supporting debt repudiation on on bonds the Fed holds is equivalent to the trillion dollar coin. Supporting one, but not the other makes no sense when they accomplish the same thing.

“On the other hand, supporting debt repudiation on on bonds the Fed holds is equivalent to the trillion dollar coin. Supporting one, but not the other makes no sense when they accomplish the same thing.”

No, they are not equivalent.

With debt repudiation, the outcome is an elimination.

With the $1 trillion coin, the outcome is an elimination and creation.

With the coin, the Fed ends up with $1 trillion of legal tender.

With debt repudiation, the Fed ends up with nothing.

Just because the Fed owning a $1 trillion coin and thus nobody in the market owns a $1 trillion coin, doesn’t mean that every scenario where the market doesn’t own a $1 trillion coin is the same.

What you are doing is failing to take into account the blatantly obvious fact that with debt repudiation, the people at the Fed end up with nothing after the repudiation, whereas with the $1 trillion coin, the people at the Fed end up with $1 trillion in legal tender.

There are tons of good reasons to oppose those at the Fed suddenly coming into ownership of $1 trillion of legal tender money, while supporting outright debt repudiation instead.

They are not equivalent, so stop claiming they are based on false premises.

“Yes. But the money that goes back to the Fed doesn’t just get morphed into the netherworld of infinity money creation.”

Well I thought it was that way. Assume the government actually taxed 1 trillion in cash, and Geithner would carry the money himself to Bernanke. What would Bernanke do with it?

Just like with the coin he cannot spend it directly. The only money that is paid to the FED and is not kept outside of the system is the interest it receives on the bonds. Else the principal goes into Nirvana, just where it came from.

If that was not so, Bernanke should have already tons of money available. I am sure some bonds come due while they are on the FED’s balance sheet.

So I really think DJ is right so far. The only thing Bernanke could do was buying bonds on the market with the coin or MBS (or whatever they will decide to buy as well in the future), if one day bonds are denominated that high (who knows?…). Yet if he had no coin there was still no constraint for him to print up a trillion and buy with usual cash.

The differences that I see are mainly psychological. The government would much rather print up coins to pay the bills than do official defaults which would hurt their image more than using some legal loophole (although I really doubt that this was legal!).

Where I disagree is that DJ seems to think that the FED will one day decrease the balance sheet to pre-crises level. Well that will not happen, never ever! I am well aware though that the mere possibility that the FED could do this does have a psychological effect.

No, the defaulting on the debt is not your “scenario 1”. The Fed should not be buying the debt. Once bought, any and all debt should be defaulted on now – but the Fed should not buy the debt… shouldn’t even EXIST.

I mean, just “forget the macroeconomics” for a second. This is just big of a slippery slope as the trillion dollar coin. Why is Ron Paul a genius while the trillion dollar coin supporters banana republic madmen?

I realize it depends on what the treasury does with the 1 T dollar coin. If they give it to the fed as down payment of debt, then it would be equivalent to the Ron Paul proposal.

Well I first thought the FED would accept the 1T dollar coin for freshly printed USDs, but it seems it would be taken as “down payment” on the debt. Yes that is functionally the same as outright cancelling 1 trillion in debt (minus the market value of 1 ounze of platinum). However also in this case I would argue that this is just a deceptive shell game, and instead of doing that, the proper way was to just directly cancel the 1 trillion the FED holds.

Defaulting on a debt that cannot be legally owed is not the same as making a trillion dollar claim on the backs of tax payers.

Ron Paul’s proposal to default on the debt owed to the Fed is based on the fact that the Fed, having just created the Fed notes out of thin air, did not actually buy anything at all, and so nothing is actually owed them.

No, the 1 trillion Fed note platinum coin (severely debased, by the way) would be just another claim on the backs of tax payers.

By defaulting on the Fed – after 100 years of currency debasement, mind you – the tax payers would just keep more of their wealth rather than handing it over to the National Counterfeiter.

Besides, we have been screwing other countries with our fiat money; The effects of this get blamed on the free market and “neo colonialism”, and then people agitate for more currency debasement, completely failing to address the real issue.

“No, the 1 trillion Fed note platinum coin (severely debased, by the way) would be just another claim on the backs of tax payers.”

guest, I am not sure I agree with you.

The platinum coin does not constitute a claim on future tax payer money like a bond would; just like a five Dollar bill doesn’t either.

I am not yet sure about all the effects of this operation (especially for private bond holders), yet one thing that should be clear is that 1 trillion in base money would be out of reach for the FED to suck up to control the money supply via OMOs.

The platinum coin does not constitute a claim on future tax payer money like a bond would; just like a five Dollar bill doesn’t either.

Not that the government is allowed to mint platinum currency, but it is a claim on citizens’ goods and services created out of thin air (minus the actual market value of platinum which would comprise the coin).

All IOUs in excess of specie – including new 5 Fed bill notes – are a claim on the backs of those who actually produced something of value.

guest, ok I was not sure how you meant that. In the case of the 1T Dollar coin the “claim” of real goods and services already happened in the past when the bonds for 1 trillion where created by the government and the money created out of thin air was spent..

Now it is just about canceling out the debt (claim on future taxpayer money) the FED holds in form of bonds, which means at least you decrease future taxation with it. Though the implications for the USD itself are I guess not so good..

Listen in my opinion at least the US and Europe and Japan are running into the wall earlier or later. Such discussions about the necessity of 1T Dollar coins, SS already has a negative cash flow, the repatriation of 700 tons of Gold by the BUBA, Japans Shinzo Abe threating to make the BOJ a branch of government to create more inflation and many other things that were unthinkable a few years ago is the writing on the wall in big letters that IMHO clearly indicates where this is going…

In the case of the 1T Dollar coin the “claim” of real goods and services already happened in the past when the bonds for 1 trillion where created by the government and the money created out of thin air was spent..

Both the government bonds and the Fed notes are claims; they aren’t money.

Government bonds are a promise by A to pay B using wealth confiscated from C.

Fed notes in excess of specie are essentially a government-granted privilege to steal directly from the citizens (paper being an IOU rather than money).

So, in the case of the 1 trillion Fed note coin, the government has made a claim on taxpayers’ wealth that would have been paid in an increased ability to steal directly from the citizens (otherwise known as an inflation tax).

Government is insolvent, but in exchange for the Fed enabling the government to steal from the people, it will use it’s monopoly of force to grant the Fed to do the same thing.

The classic meaning of debt. Mike lends money to Acme Corporation. Acme buys equipment and hires people. It pays Mike back out of the increased production enabled by the loan. If Acme fails despite good faith, then Mike is repaid only part or none of his loan. Mike gains or loses according to his judgement of Acme’s management. The peasants gain from more jobs and higher incomes, except only sometimes Acme fails, when they gain and lose nothing.

The government’s meaning of debt. Mike lends money to the local bandit, Calvera. Calvera proclaims his bandit honor and promises always to repay. Calvera raises cash by collecting tribute from the surrounding coutryside, or if need be, he prints up counterfeit cash. Mike expects he will always be repaid. Mike gains by judging that Calvera has enough guns and the desire to preserve his reputation.

It is the peasants who have to pay, both in more tribute and from taking the counterfeit cash in exchange for real goods. The counterfeit cash represents nothing new of value, so prices eventually go up. The peasants accept that it has always been this way. They do not work hard, and there are fewer loans to businesses to expand production. Fittingly, Mike also pays something as prices go up during his loan, leaving him with cash that is of less value when he gets it back.

Default is the more equitable outcome. Mike should lose for intentionally supporting and attempting to profit from the government.

– –
Classic debt funds production and future prosperity. Government debt funds Calvera’s wild parties and requires more tribute and counterfeiting. Any Government debt reduces prosperity, and the more debt the less prosperity.

The Magnificent Seven.
The bandit leader Calvera talks to Chris, the leader of the seven gunmen who have agreed to defend the farmers. Chris asks how Calvera can justify robbing the farmers.
Calvera: “If God didn’t want them sheared, he would not have made them sheep.”

A fantasy supports the idea that our government increases the wealth of our society when it borrows and spends. There is no wealth multiplier from the flow of money. If there were, we would all be living in Aruba by now as a result of huge government borrowing and spending.

If there were a multiplier such as the supposedly conservative 1.5 multiplier claimed by Team Obama, then we could Counterfeit Our Way to Wealth.

“Didn’t you support Ron Paul’s plan to default on the bonds the Fed holds? How is that any less idiotic?”

OK! Let’s see what justification the Fed will give for buying the bonds the next time around after the first default. Let’s also see who else would buy the bonds after that default. Let’s therefore understand what effect a default will have on government’s ability to borrow by issuing bonds.

On the other hand, do tell me why the Treasury will find it tough to mint more coins after the first round.

Keep in mind, I’m talking about defaulting on the Fed, not on regular bond holders. If anything, saying you’re going to default on the Fed is just a sneaky and underhanded way to say you’re going to inflate away some debt.

If anything, saying you’re going to default on the Fed is just a sneaky and underhanded way to say you’re going to inflate away some debt.

DJ, I’m too lazy to think this through carefully. On a first glance, I don’t see how this works. If anything, people were freaking out (I think incorrectly) that RP’s proposal would lead to DEflation. So can you spell out your remark?

DJ okay now I at least understand why you say they are equivalent, but even here, you see that only if this were a policy *going forward* would they kinda sorta be equivalent. So at best you can be saying, “RP’s proposal politically wouldn’t push us in the direction he wants, instead it would be a slippery slope to something as nutty as, oh I don’t know, minting a trillion dollar platinum coin.”

I mean it was slippery slope in this way: “Hey, we need to build more roads! Lets just print some money and finance it that way just this one time. What’s that you say? We need to buy more tanks? Okay, fine lets just print some money for that. Last time. What now? Farmers are demanding subsidies? Just print some money. Oh, what the heck, lets just print money to pay all our bills”

Or using Ron Paul’s proposal.

“Hey, we need to build more roads! Lets sell some bonds to the fed and then default on those bonds. We’ll finance the roads that way just this one time. What’s that you say? We need to buy more tanks? Okay, fine lets default on the fed again. Last time. What now? Farmers are demanding subsidies? Lets default on the Fed some more. Oh, what the heck, lets just default on the Fed to pay off all our bills.”

No DJ, Ron Paul wasn’t proposing to pay for current spending by selling bonds to the Fed, and then defaulting on them in the future. He was proposing defaulting on already-existing bonds held by the Fed. His proposal wasn’t inflationary per se. The only way even Noah argued that it was, was by claiming it would set a precedent for future occurrences of print-then-default.

You are not saying what you think you are saying when you can identify two separate means to accomplish the same outcome, because you are ignoring the fact that the different means, while having the same outcome for the particular thing in question, also have different SIDE-EFFECTS.

Two different actions do not have exactly identical TOTAL outcomes.

Sure, debt repudiation and the $1 trillion coin are two different means to accomplishing the same particular outcome of eliminating the debt on the Fed’s balance sheet.

But you are ignoring the SIDE-EFFECTS from each means. The side effect of debt repudiation is different from the side effect of the $1 trillion coin.

The latter would result in the side-effect of those at the Fed owning $1 trillion in new legal tender. In principle, they could use that legal tender to PURCHASE assets in the future. Now, you can claim that they probably won’t, that they promise not to, and so on, but regardless, they’re different.

Mr. Smith having $1 trillion and promising not to spend it, is way different than Mr. Smith not having that $1 trillion.

If you can understand how Hilter having nuclear weapons but promising not to use them, is different from Hitler not having nuclear weapons, then you can understand how people can seem to contradict themselves and support one but not the other.

“No DJ, Ron Paul wasn’t proposing to pay for current spending by selling bonds to the Fed, and then defaulting on them in the future.”

Whether it happens retroactively or if it’s planned ahead, it’s an arbitrary distinction. The principle is the same. You’re printing money to pay bills. If Ron Paul didn’t intend that, then fine. The slippery slope would be “If can pay off current debt by defaulting on it, why not the future debt?” I didn’t see you try to apply public choice theory to Ron Paul’s proposal. I’m sure Krugman doesn’t intend to pay all bills via platinum coin forever, but you still attacked the idea and called it a slippery slope.

“His proposal wasn’t inflationary per se.”

When we’re out of the zero bound, it would most certainly be extremely inflationary. The Fed wouldn’t be able to sell bonds to prevent excess reserves from leaking out. Ron Paul not once talked about a way to sterilize it. I don’t think it even crossed his mind. Did he just assume Bernanke to raise reserve requirements on his bank buddies?

First, do you understand how debt repudiation, and $1 trillion coin, whilst accomplishing the same particular outcome of eliminating debt on the Fed’s balance sheet, will nevertheless have different total outcomes, in that one will have those at the Fed end up with $1 trillion of new legal tender out of thin air, whereas the other those at the Fed will have nothing more, just less?

If you can understand how a person can support having the Fed’s balance sheet shrink, but not support having the Fed’s balance sheet remain the same (at least initially, as $1 trillion of debt is exchanged for $1 trillion in legal tender), then you can understand how supporting one doesn’t mean one has to support the other, DESPITE the fact that they both accomplish the same narrow outcome of eliminating debt on the Fed’s balance sheet.

You need to take into account all the outcomes, not just the one in question.

“No, there is no printing money to pay off bills in outright debt repudiation.
For debt repudiation, there is not a single new dollar created. There is just a write-off.”

Yes, technically a new dollar isn’t created in Ron Paul’s plan, but those dollars were never meant to be permanent. You’re ignoring the baseline. The baseline is to have a lower monetary base close to pre-crises levels in the future by having the Fed sell its assets. Ron Paul’s plan would have created a permanently higher monetary base (1.6 trillion higher) because the fed would have lost assets to sell. So Ron Paul was advocating having more fraudulent funny money in circulation in the future than there would have been for the purpose of having a lower national debt. THAT’s the nutty part.

As for the platinum coin, lets say it’s a 1.6 trillion platinum coin to match Ron Paul’s plan to default on 1.6 trillion worth of bonds. The baseline would have been sell off most of the bonds the fed currently holds to bring back the monetary base close to pre-crises levels. Lets’s say the Fed continues with that plan of selling off assets and the treasury continues with the platinum coin plan, but the Fed never sterilizes the platinum coin. The monetary base would once again be 1.6 trillion dollars higher, which is same as Ron Paul’s default plan. Very little difference except the coin plan is less nuttier because you can still buy back the coin.

“Yes, technically a new dollar isn’t created in Ron Paul’s plan, but those dollars were never meant to be permanent.”

But that’s the whole issue under dispute. Are you saying that you believe the coin would have been destroyed as soon as it is transferred to the Fed?

That’s a future event that may not actually occur. It’s one thing to say the coin isn’t going to be held for long, or isn’t going to be spent, and all of those promises, but it’s another thing to know that it’s not being created in the first place.

You keep ignoring the source of the dispute here. Nobody is disputing the fact that repudiation and the coin will both have the effect of eliminating the debt on the Fed’s balance sheet.

What is being disputed here is that in the one case, a coin with a legal tender value of $1 trillion is being created, which is used to purchase outstanding debt at the Fed. In the other case, debt is simply being written off.

” You’re ignoring the baseline. The baseline is to have a lower monetary base close to pre-crises levels in the future by having the Fed sell its assets. Ron Paul’s plan would have created a permanently higher monetary base (1.6 trillion higher) because the fed would have lost assets to sell.”

While I get what you are saying, and to an extent agree with it, it is a different issue entirely, plus it’s not exactly true.

The Fed doesn’t actually need assets to take base money out of the economy. It can simply raise the IOR rate, or it could enforce a higher reserve requirement at banks, or it sell it’s existing assets after the repudiation of $1 trillion in debt.

There are more options than what you seem to be implying.

” So Ron Paul was advocating having more fraudulent funny money in circulation in the future than there would have been for the purpose of having a lower national debt. THAT’s the nutty part.”

Now you’re ignoring the fact that the alternative would be for the Fed to have that $1 trillion funny money coin in its possession.

You’re trying to blame Paul for the potential existence of more funny money in existence (base money created by the Fed), when the other alternative being considered, the $1 trillion coin, would just be a situation of there being an additional $1 trillion of REALLY funny money in existence.

In other words, between the two artificial choices you have set up, the choice is either more reserves, or more $1 trillion coins. You can’t possibly blame Paul as advocating for MORE funny money, when the way you have it set up, Paul can only choose between $1 trillion of base money funny money, or $1 trillion coin funny money. You are not presenting him with any alternative that would see BOTH lower base money and non-existence of a $1 trillion coin.

“As for the platinum coin, lets say it’s a 1.6 trillion platinum coin to match Ron Paul’s plan to default on 1.6 trillion worth of bonds. The baseline would have been sell off most of the bonds the fed currently holds to bring back the monetary base close to pre-crises levels.”

You’re just saying the baseline is no debt repudiation and no $1 trillion coin. In other words, the “baseline” to you is the status quo for some indefinite time, after which indefinite time the Fed can sell its treasuries in order to remove base money.

But that ignores the assumption that the debt has to be reduced in the short term, not kept on the books, added to, and then the Fed uses that debt to remove base money as if there isn’t even a debt problem in the first place.

You are not keeping consistent the context of this whole debate. The whole reason why the coin is being proposed is because there is a debt problem. That is the priority.

“Lets’s say the Fed continues with that plan of selling off assets and the treasury continues with the platinum coin plan, but the Fed never sterilizes the platinum coin.”

What do you mean by sterilize here? If the Fed is paid with a $1 trillion coin, in exchange for treasury debt, then the outcome is Treasury owning its own debt, which means no more debt, and the Fed would own a $1 trillion legal tender coin.

Are you saying the Fed would melt it down and destroy its legal tender status?

“The monetary base would once again be 1.6 trillion dollars higher, which is same as Ron Paul’s default plan. Very little difference except the coin plan is less nuttier because you can still buy back the coin.”

That makes no sense. You just said before that the Fed would be engaging in a program of selling treasuries, and the Treasury would be using the $1 trillion coin to buy its own debt back. You would still be in context of the Fed ending up with a $1 trillion coin.

The outcome of that would be less debt, more legal tender, and no change to reserves (since the Treasury buys the treasuries owned by the Fed, using the coin).

As for reserves, if the Fed sells treasuries to the Treasury in exchange for the coin, then base money would be unchanged, and you’d still be left with a smaller balance sheet Fed, in supposed obligation to remove base money from the banks.

Murphy, so you’re saying that you do agree with me that Ron Paul’s plan would be inflationary in the future only if the Fed is telling the truth when it says it’ll eventually unwind its balance sheet? Is it just a matter of you not believing the Fed will do what it says?

Murphy, so you’re saying that you do agree with me that Ron Paul’s plan would be inflationary in the future only if the Fed is telling the truth when it says it’ll eventually unwind its balance sheet? Is it just a matter of you not believing the Fed will do what it says?

DJ, this whole argument is getting surreal. It’s like you calling Ron Paul’s plan to abolish the IRS a tax hike, because you think if Romney got elected, he’d cut taxes even more.

We both agree that Ron Paul’s proposal is not *directly* inflationary, and in that respect is nothing like the trillion dollar coin. Then, you are arguing that for it to be even indirectly inflationary, we have to suppose that Bernanke is a truth-telling guy who’s going to shrink the Fed’s balance sheet in the future when QE9 finally fixes things. Since neither Ron Paul nor I think that is a likely scenario, I don’t see how we are in any way (by entertaining repudiating the debt held by the Fed) doing “basically” the same think as Krugman in advocating a trillion dollar coin.

I don’t know why people are agreeing with DJ that Ron Paul’s proposal is inflationary.

What is being disputed here is that in the one case, a coin with a legal tender value of $1 trillion is being created, which is used to purchase outstanding debt at the Fed. In the other case, debt is simply being written off.

All fiat money creation in excess of specie is debt being written off.

Instead of actually paying with something of value, the Fed (or the Treasury, in the case of severely debased platinum) is “paying” in IOUs – IOUs which are now actually just IOU-Nothings.

Since these pieces of paper don’t have real value, the Fed didn’t really buy anything, and so nothing is owed to them.

And I did think the skit was hilarious. I laughed several times actually. I just agree with Krugman that Jon Stewart’s “brand” is good analysis plus funny jokes, and we only got half that this time (well, three quarters if you count “the coin is goofy” as analysis, which is fair enough).

Again, that’s what his writers are for – I don’t see why the content is any less appropriate except I suppose that it wouldn’t resonate with the average person as much. But that’s exactly why he ought to say it! To get it to start to resonate!

Seriously – the DeLong/Summers BPEA paper is hilarious stuff. They are paying the government to take their money. That’s the bottom line. Stewart could definitely make a sketch out of that concept.

“Oh no! It’s not about that! Yes, it was funny, yes he had a point, yes, yes, yes, yes…….BUT, I cannot completely support it, for obvious reasons, so I will find something, ANYTHING to latch onto and quibble over it.”